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NEW : A CASE FOR REJUVENATION OR INSPIRED ALCHEMY?

DIMITRIS MILONAKIS *

ÍNDICE

I. INTRODUCTION...... 2 I. EARLY : THE ...... 4 II. MARKET SOCIALISM AND THE QUESTION OF KNOWLEDGE: THE AUSTRIAN CHALLENGE ...... 6 III. THE QUESTION OF INCENTIVES: MARKET SOCIALISM AND ‘NEW INFORMATION ’.... 7 IV. MODERN VERSIONS OF MARKET SOCIALISM ...... 10 V. NEW MARKET SOCIALISM: A CRITIQUE FROM WITHIN...... 14 VI. TOWARDS A MORE RADICAL CRITIQUE ...... 17 VII. BY WAY OF CONCLUSION...... 21 VIII. REFERENCES ...... 22

*Department of Economics, University of Crete. I would like to thank Ben Fine for his painstaking critique of an earlier draft of this paper. My thanks also go to Costas Lapavitsas, George Argitis, the participants of the Fourth Annual Conference of the European Society for the History of Economic Thought, Graz, Austria, February 2000 especially my discussant Stephan Boehm, and the anonymous referees of this journal for helpful comments and suggestions. Last, my thanks to Stavros Ioannides for his help with the literature on Austrian economics. Any remaining errors are mine alone.

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 1 I. INTRODUCTION 3. It was not until the ‘calculation debate’ of the 1920’s and 30’s that the concept of market 1. Socialism as a concept has its roots in the socialism itself was used and the idea of the eighteenth century Enlightenment’s ideals of marriage of socialism with markets re— equality and co—operation, whereas the term emerged. Although the ‘calculation debate’ itself was coined during the 1820’s. Throughout started as a reaction by the Austrians (see most of its history and certainly throughout the Mises, 1920) to central planning, the debate nineteenth and early twentieth century, from itself was actually conducted between socialists and Frederic Engels to the Fabians, of neoclassical persuasion (Lange, Dickinson, the concept has been held to be synonymous Taylor, Lerner) and representatives of the with corporate planning in the context of Austrian school (Mises, Hayek, Robbins) with common of the . Marxian interventions by Dobb. The result was As such, the essence of the concept has the crystallisation of the idea of a marriage traditionally been based on a critique of between markets and socialism in the form of a as an exploitative class system and formal model proposed by Lange which has has correspondingly been hostile to both since become the standard point of reference. It markets and private ownership (Hodgson, was widely thought at the time that the midway 1999b, ch.2). house (midway between central planning and 2. Market socialism as a concept has a shorter capitalist free markets) presented by Lange’s history: its origins can be traced back to the ‘competitive model’ had won the argument (see 2 calculation debate of the 1920’s and 1930’s. for example Bergson, 1948). However, the basic idea associated with it⎯to 4. This was a reflection of the ideological marry socialism with markets—is climate of the period which was characterised contemporaneous with the invention of the term by ‘the intellectual dominance of socialism’ ‘socialism’. Thus from Pierre Proudhon’s free (Mises, 1981, p. 465). The widely held view at association of small independent producers the time was that the socialist system was a ⎯what Marx called ‘petty ’ more advanced than capitalism, reflecting the fact that, at that time, ⎯to ’s sympathy with decentralised co—operative socialism, the idea the Soviet economy was witnessing has been to combine the efficiency of markets exceptionally high rates of growth at a time when the West was plunged into the vagaries of with the egalitarian goals of socialism. Having said this, it is also true that the idea of the Great Depression of the 30’s. Even then, combining socialism with the market would be however, the ideological climate on the left was such that the idea remained in a subordinate considered a contradiction in terms by most 1 nineteenth century socialists (ibid). 2 It has to be said at this point that the real answer to Mises came not from Lange but from Lenin, when he introduced his 1 For a potted history of the concept of socialism together with a New (NEP) in Russia. Mises’ was above all a critical review of recent debates see Hodgson 1999b, ch. 2; for critique of what subsequently came to be known as War a potted history of the concept of market socialism see . When he introduced NEP at the beginning of Blackburn, 1991; for more general histories of socialism see 1921, Lenin answered Mises in practice through the partial Landauer, 1959; Mackenzie, 1966; Thompson, 1988; Itoh, introduction of the market mechanism. It is in the real 1995. The literature on market socialism is by now enormous. experience of NEP in Russia as well as of the ‘central planning No attempt will be made in this article to offer a comprehensive with a ’ reforms in Eastern Europe and of review of this literature. Rather only selective references will be China at the present time, that we can see the achievements – made to this literature where necessary. Vaughn, 1980, Murrell, and limitations – of (real) market socialism. Indeed, as we shall 1983 and Lavoie, 1985 offer comprehensive reviews of the see in more detail below, one of the main drawbacks of the ‘calculation debate’ from the Austrian perspective; for more proposals discussed in this article is the fact that they do not general critical reviews of the whole debate on market discuss real market socialism as such, preferring instead to deal socialism see Adaman and Devine, 1996, 1997. with the of abstract models of market socialism.

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 2 position among socialists. The fact that nothing is more than evident in recent discussions of approximating Lange’s model had ever been alternative models of socialism where Marx is tried in practice pays testimony to this. At that hardly mentioned.3 In such a climate many time the term ‘socialism’ was still being used in socialists have resorted to reliance on the the traditional sense to imply central planning market once again, favouring either proposals and ownership of the means of production. involving some sort of as in the 5. ‘Socialism’, in this traditional sense, case of Nove and Brus & Laski, or a although much debated, has been on the retreat reformulation of the concept of market since 1945. The relative success of , as in the models proposed by mixed economies of the West during the so— Bardhan and Roemer and others. At the same called golden age of capitalism in the 50’s and time radical is being 60’s coupled with the problems increasingly abandoned by these writers in favour of neo— facing the centrally planned economies, classicism. Naturally, the way the issue of contributed to a discrete change in the socialism is being treated has also been ideological climate. This change was reflected changing radically, away from the traditional in the reform movement in the centrally issues of exploitation, class, power, conflict and planned economies. The main thrust of these social transformation to concepts such as reform proposals ⎯what came to be known as (juridical) relations and equitable ‘central planning with a regulated market’ distribution of income. In reformulating the ⎯was the introduction of the (limited) use of concept of market socialism, recent markets in the context of and developments within in central planning. It was in the 1980’s and the form of the ‘new ’ 1990’s, however, with the rise to dominance of and the incentive compatibility and the the ideology of the New Right, principal/agent literature, have played an together with the demise of the centrally important part, both in the recent critiques of planned economies that the ideological climate the early models, as well as, in the changed decisively. conceptualisation of the new models. 6. Following the revival of the Austrian school 8. Based on these developments, Lange’s model in the 1980’s, it has increasingly been argued is seen as limited from the modern perspective, that the ‘calculation debate’ had been wrongly its main deficiency being identified with its interpreted as having been conducted between neglect of the twin 10. issues of incentives and socialists and non—socialists arguing within monitoring. But these late models will also be the same paradigm. Rather, the revisionists critically shown to be equally limited by their suggest, what was involved was a clash own context. The aim of this article is exactly between two different epistemological and to examine the relative merits and drawbacks of methodological paradigms. Seen in this light, the new generation of models of market the conclusion drawn by most is that the socialism. This will be done, firstly, by putting Austrian challenge had not been met effectively these modern versions of market socialism into and that they had won the earlier argument the perspective of the history of economic (Vaughn, 1980; Murrell, 1983; Lavoie, 1985; thought. Thus, after a brief sketch and a critique Adaman and Devine 1997; Ioannides, 2000). of Lange’s proposal, the main elements of the 7. At the same time, the demise of socialism in Eastern Europe is thought by many socialists to 3 There are, of course, exceptions to this rule, which, however, have invalidated Marx’s vision of socialism simply reinforce the rule. See inter alia Laibman, 1992; interpreted as the abolition of McNally, 1993; Gray, 1995; Itoh, 1995; Ollman, 1998; Lawler, 1998. Although Lawler does refer extensively to Marx, he does combined with conscious central planning. This so in order to defend market socialism.

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 3 Austrian and the new information critiques of ⎯resources to alternative uses). Provided that this model are critically assessed. This leads in socialism is defined as some sort of ⎯market the fourth section to the presentation of the economy, the economic theory of equilibrium is basic elements of the new generation models. better equipped to analyse the workings of the Then, in the last two sections, the new socialist economy as well. On this generation models are subject to close scrutiny. methodological foundation, his basic aim could This is done, firstly, by making the necessary be achieved by simply substituting public comparisons and drawing the necessary (state) ownership for private ownership, and by contrasts between modern and earlier versions harnessing the market through the elimination of the model (mostly the Lange model) to see of capital markets, but allowing for real markets what is new that they have to offer and whether to operate in the consumer goods and labour they really represent a sharp break with the market sectors. In the absence of real capital past. Secondly, the internal consistency and markets, the Central Planning Board (CPB) coherence of these models is scrutinized in through a Walrasian trial and error procedure terms of their own proclaimed goals. Finally, undertakes the function of determining the price based on this scrutiny, a more thorough of capital goods. The CPB announces prices methodological critique of these models is which all market participants take as given. provided. Given these prices, firm managers are instructed to follow two rules: they have to I. EARLY MARKET SOCIALISM: THE choose, first, the combination of the factors of LANGE MODEL production that minimises the average cost and, second, the level of output at which the 9. Lange’s basic aim was to construct a model is equal to the price of the that could imitate the efficiency properties of product. In the case of consumers, the guiding capitalism defined as allocative efficiency, principle of their market behaviour still remains while eliminating the extreme income that of utility maximization.5 Last, the volume inequalities and macrostability problems of investment (rate of accumulation) in Lange’s associated with private property (Lange, 1936, model is determined ‘corporately’ by the CPB.6 pp.105—6). At the same time, his model would 10. Lange’s model was very much a product of provide a solution to the problem of calculation the preoccupation of the economic theory of his which, according to Mises who first raised the time and of the then prevailing ideological issue in his article which set off the ‘calculation climate. Although Lange’s model appeared at debate’, is caused by the absence of private approximately the same time as Keynes’ property under socialism and the consequent absence of a market for capital goods to 5 The prices thus arrived at by this iterative process are not real 4 market prices but accounting (shadow) prices. In this way, what determine their prices (Mises, 1920). The Lange manages to show is that some form of decentralised methodological basis on which this could be planning is possible without the overcentralisation tendencies done is the same as the analysis of capitalism. inherent in the soviet model of central planning and without the concentration of knowledge required by this system (see According to Lange (1936, pp.107—8), there is Lavoie, 1985, pp.126—8). a ‘formal analogy’ between the problems facing 6 How this investment is then allocated to various industries is any sort of exchange economy (in all such cases not entirely clear. It seems that this decision is left to the managers of these industries to decide following the second rule this is a problem of allocation of scarce referred to above (price equals marginal cost). What the CPB finally does is to adjust the rate of interest so that the demand for investment is set equal to its supply as determined by the 4 For discussions of Lange’s model and of the ‘calculation CPB (see also Dobb, 1939, pp.42—3).demand for investment is debate’ more generally see Lavoie, 1985; Brus and Laski, 1989; set equal to its supply as determined by the CPB (see also Kowalik, 1987; Kirzner, 1988. Dobb, 1939, pp.42—3).

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 4 ‘General Theory’, at the micro level, despite contrary to the widespread view, the Walrasian Chamberlin’s and Robinson’s work on system is, in fact, a centralised system where imperfect competition, neoclassical the auctioneer is supposed ‘to gather, process microeconomic theory mostly in its Marshallian and communicate huge amounts of partial equilibrium form, was still going information’ (Hodgson, 1999a, p. 41 and relatively unchallenged. The ideological climate references therein).8 At the same time, general on the left during this period, dominated by the equilibrium is an ‘as if’ theory. It treats the relative hegemony of the idea of central functioning of the market ‘as if’ it is guided by planning and state ownership, also left its a fictitious auctioneer.9 This is the result of imprint on Lange’s actual model, in the sense what Arrow (1959, p. 43) has called a ‘logical that he retained state ownership, that he did not gap’ in the theory: in the perfectly competitive allow for real markets to function in the capital world there is no real agent to make a decision goods ⎯sector and that decisions concerning on price. 10 In this sense, the CPB, by filling a the rate of investment still remained in the logical vacuum in the theory, helps to enhance hands ⎯of central authority. its welfare properties. 11. Lange’s achievement was to show that if the 13. Further, as Dobb (1939, p. 50—1) has said, neoclassical equilibrium theory is an accurate Lange’s model of market socialism is ‘an description of the working of the competitive ingenious proposal for reproducing in a capitalist system, then the same theoretical socialist society the ‘ideal capitalism’ of apparatus can be employed to analyse the ’s imagination’. This is an early working of market socialism. The specific incidence of what has been dubbed ‘new institutional set up did not really mater (Lange, economic virtualism’ (Carrier and Miller, 1936, 61—2). In fact, Lange reads in 1998). More importantly, what Lange’s neoclassical theory exactly what it implies: that exercise has done, despite the author’s the presence of the auctioneer is more important intentions, is to expose the weaknesses of than the existence of either real markets or private property, and that neither markets nor equilibrium through the actions of the CPB is much shorter, private property are necessary for an efficient because of its wider knowledge relative to any private allocation of resources (Hodgson, 1999b, pp. entrepreneur (ibid, p. 89). 8 34—5). As Lavoie (1985, p. 122) puts it, ‘if the For the opposite view where Walrasian theory is treated as emphasising the decentralisation/ information role of prices see equilibrating process of real world capitalism is Makowski and Ostroy, 1993. explained by recourse to a Walrasian 9 It should be noted here that the fictitious auctioneer is based auctioneer, (there is no reason) why a planning on the practice of the Paris Bourse. Lange’s procedure simply amounts to applying to the whole economy the price setting bureau could not similarly function as a procedure used on the Paris Bourse. In evaluating the Lange coordinating agent’. model, one has to consider, inter alia, whether the same price 12. Not only that, but his system can actually setting procedure is, first, efficient in all markets and, second, a correct description what is going on in other markets (see Biais achieve better results partly because the place et al, 1999). (I owe this point to an anonymous referee.) of a theoretical construct — the fictitious 10 In Arrow’s (1959, pp. 41—3, quoted in Makowski and auctioneer — is taken by an institution with Ostroy, 1993, p. 72) words, ‘there exists a logical gap in the usual formulations of the theory of the perfectly competitive real, actual existence, the CPB (Lange, 1936, economy, namely, that there is no place for a rational decision pp. 89—90).7 This is not surprising since, with respect to prices as there is with respect to quantities. The standard development of the theory of behaviour under competitive conditions has made both sides of any market take 7 Lange gives two further reasons why his model would the prices as given by some outside agency…Each produce better welfare results: first, because through the more participant in the economy is supposed to take prices as given equitable distribution of income achieved the equilibrium and determine his choices as to purchases as sales accordingly: reached is welfare enhancing (Lange, 1936, pp.98—103); there is no one left over whose job it is to make a decision on second, and more dubious,the adjustment time needed to reach price.’

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 5 neoclassical theory as a framework for 15. In his endeavour, the question of tacit analysing either markets or capitalism. This line knowledge was to assume central importance. of argument is also the point of departure of the So what does this concept involve? As he puts Austrian critique of market socialism to which it, ‘the knowledge of the circumstances of we now turn. which we must make use never exists in a concentrated or integrated form but solely as II. MARKET SOCIALISM AND THE the dispersed bits of incomplete and frequently QUESTION OF KNOWLEDGE: THE contradictory knowledge which all the separate AUSTRIAN CHALLENGE possess’ (1945, p. 77). This knowledge of ‘the particular circumstances of 14. If neoclassical socialists, as they later came time and place’ that only the ‘man on the spot’ to be known (Vaughn, 1980), were the main can possess and deploy, is of central importance proponents of socialism in the calculation in any economic system. debate, the Austrians were their main adversary 16. Given the subjective and dispersed nature of arguing for the virtues of the free market knowledge and its derivative nontransferable system based on private property.11 Hayek, character, its concentration in a single mind is faced with Lange’s ingenious exposition of the unthinkable. Hence efficient central planning feasibility of a (partially decentralised) planning becomes impossible. Further, this knowledge system, was forced to accept its logical can only be acquired through a competitive possibility given its theoretical neoclassical process which, rather than reflecting a passive premises and, initially, simply to question its price taking and quantity adjusting behaviour practical possibility (Hayek, 1940, pp. 187—8). on the part of the producers as neoclassical In addition to this, however, Hayek also started theory assumes, is defined as a rivalrous questioning the very premises on which this process through which knowledge is being both theoretical possibility was established: generated and diffused to all economic actors. neoclassical theory itself with some of its most Here competition is portrayed as a ‘discovery basic assumptions such as the concept of process’ (Hayek, 1978): the vehicle through stationary equilibrium, of competition as which knowledge is dispersed to all market passive price taking behaviour and the participants. In this process the role of assumption of perfect knowledge. entrepreneurship is indispensable. In a world where the data are constantly changing, the function of entrepreneurship is to seize profit opportunities before anybody else, a sort of 11 Despite differences of emphasis or even substantive differences between the two main representatives of this school perpetual condition of arbitrage. in this debate (Mises and Hayek), one thing is sure; this debate 17. What makes this profit motive operative, contributed a great deal towards the clarification and further however, is the private ownership of the means elaboration of their ideas. This is especially true with regard to some of the most central ideas of the Austrian school such as of production. As Lavoie (1985, p. 183) puts it, the subjective and dispersed nature of knowledge and the ‘competition necessarily requires private conception of the market process and competition as a ownership in the means of production in order discovery process (see Hayek, 1937, 1940, 1945, 1946, 1978; see also Kirzner, 1988; 1992, ch. 6; for a concise account of the to serve its function as a discovery process’. development of Hayek’s ideas see Caldwell, 1988). The This is so, because only private owners have Austrian critique presented here is not necessarily based on the incentive to act in an entrepreneurial way. their immediate reaction during the debate, although most of their ideas were already present in this early stage, but on their In the absence of private property, financial overall critique as it first emerged during the debate itself and responsibility for one’s actions is lost. Hence in was then further consolidated in their subsequent writings as the absence of the incentive to act well as in the writings of their modern epigones during the revival of the debate in recent years. entrepreneurially, the competitive process is

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 6 frustrated.12 So for both Mises and Hayek it is methodological starting points: methodological either markets or socialism. There can be no and subjectivism albeit with very midway house between central planning and different contents. On this basis, it is difficult to capitalist free markets that can successfully establish a truly dynamic theory of the market reproduce the entrepreneurial discovery system, which ‘can only be based on an function of the capitalist market process. objective view of the forces that set the 18. A final point concerns the critique of the economy in motion’ and such a view of the neoclassical concept of equilibrium. In the market necessarily undermines the subjective Austrian conception of the market system the nature of Austrian theory (Ioannides, 1992, p. basic role of the price mechanism is no longer 85; see also last section). the equilibrating function but the communication/ coordination of knowledge III. THE QUESTION OF INCENTIVES: function (Hayek, 1945, p. 86). It is through the MARKET SOCIALISM AND ‘NEW that the knowledge that has been INFORMATION ECONOMICS’ generated during the competitive process is being dispersed to all market participants. So 20. According to Makowski and Ostroy (1993, the price system rather than being an allocative pp. 81—2) any economic mechanism design mechanism, represents a knowledge must meet at least two basic requirements: first, mobilization system, whose main function is the information/ communication requirement the utilization and dissemination of and, second, the incentives requirement. The (subjectively held) knowledge. In the Austrian question of incentives was first raised by Lange problematic, the concept of equilibrium is himself only to be dismissed by him as replaced by the concept of market process belonging to the field of sociology (Lange, which, according to them, captures the 1936, p. 109). The Austrians, on the other hand, uncertainty, time and change aspects of real focused almost exclusively on the former market functioning which are left completely although, as we have seen, they did touch on untouched by the Walrasian framework (Mises, the question of incentives mostly by stressing 1949, p. 354; O’Driscoll and Rizzo, 1985, p. the importance of private ownership in 85; Ioannides, 1992, ch.6). motivating people to act entrepreneurially 19. Some have argued (see Adaman and (Hayek 1935b, pp. 175—6). Devine, 1997) that on the basis of this critique 21. Only in the last three decades through the the Austrians have built a different emergence of ‘new information economics’ epistemological and methodological framework associated with the ‘incentive compatibility’ for analysing the market system. However, their and ‘principal/agent’ literature on the theory of substantive differences notwithstanding, it still the firm, has the question of incentives surfaced remains true that both approaches share similar as an issue of any importance within mainstream economics.13 Following the re— 12 This position of the Austrian school is a forerunner of the emergence of the market socialist debate in the ‘property rights’ approach in economics, which stresses the importance of clearly defined property rights in providing 80’s and 90’s, and on the basis of these new incentives to the agents to work out efficient economic developments in , a arrangements (Coase, 1960; Stiglitz, 1995, p. 11; see also renewed assault on the original market socialist below). It is also a forerunner of Kornai’s ‘soft budget constraint’ referring to the tendency of the to model has been launched (Stiglitz, 1995; intervene through subsidies, soft and other means in order to keep loss—making enterprises in . Once again, in these conditions, financial responsibility is transferred from the 13 The phrase ‘incentive compatibility’ was coined by Hurwicz firm to the government thus removing the firm’s incentive to be (1972) who was also one of the pioneers of mechanism design competitive (see Kornai, 1986a). theory (see Makowski and Ostroy, 1993).

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 7 Makowski and Ostroy, 1993) and new models correct, market socialism would have been of market socialism have been proposed correct’ (Stiglitz, 1995, p. 10). It follows that (Bardhan and Roemer, 1992; Bardhan and ‘the very criticisms of market socialism are Roemer, (ed.), 1993; Roemer, 1994). In this themselves, to a large extent, criticisms of the section the basic elements of this critique are neoclassical paradigm’ and vice versa (ibid). It presented, whereas the investigation of the main just so happens that two of the basic ingredients of the new models is the subject of presuppositions of the perfectly competitive the next section. model are again found wanting: the information 22. As we have seen, the emphasis of the efficiency assumption and the existence of a Austrian critique of market socialism focuses full set of markets postulate. Emphasis is once on the role of competition and the concept of again laid on the information properties of the knowledge, as well as on the necessity of model. Thus, the presence of asymmetric private property. The latter later became the information and the related costs of acquiring it, exclusive focus of attention of the ‘property lead to market imperfections (in the form of rights’ school (Coase, 1960). For this school the imperfect competition and other inefficiencies). clear assignment of property rights and the The same implication follows from the absence consequent incentives this gives to the owners of a full set of markets. In the absence of to reap the full benefits of their efforts are the futures and risk markets, for example, capital secret that lies behind the success of market markets are necessarily inefficient. In both economies. The absence, on the other hand, of cases the market outcome will not be such well—defined property rights under (constrained) Pareto efficient with the socialism (and market socialism), and the implication that interventions by the consequent absence of the appropriate government may be welfare enhancing (ibid, p. incentives represents their Achilles’ heel, which 29). Hence follows the justification for necessarily cripples the efficiency properties of increased government intervention in the the system. A critique of this position is the economy. point of departure of the engagement of the new 25. Related to the question of asymmetric and information—theoretic approach with market costly information are the twin problems of socialism. According to Stiglitz (1995, pp. 11— incentives and monitoring. This question, 3), the clear assignment of property rights does which is left completely untouched by the not necessarily lead to efficient outcomes as the competitive Walrasian model, lies at the heart existence of public goods and of the critique of early market socialist models illustrates. At the same time, the absence of from the prism of incentive compatibility well—defined property rights need not lead to theory.14 The basic issue addressed by this efficiency problems. So, what lies ‘at the core literature is the question of ‘how to design (and of the success of market economies’ is not so implement) monitoring and reward structures much the issue of private property rights but that ‘align’ incentives’ in the presence of some other central features of the market asymmetric information (ibid, p. 68). At the system such as markets themselves and inter— same time, a political problem ‘largely firm competition (ibid, p. 13). 23. ⎯If property rights are not the problem 14 As Makowski and Ostroy (1993, p.74) put it, ‘efficiency with market socialism, what is? prices are given exogenously by a ‘Walrasian auctioneer’ or some ‘central planning board’. There may be a communication 24. Again, for Stiglitz, the problem lies with the process between the center and the agents ‘on the spot’ required underlying framework: the Walrasian general to discover the market clearing prices; but it is assumed that equilibrium model. As he puts it, ‘if the agents will cooperate with the price—setting agency and not try to willfully distort the latter’s collected information…. In the neoclassical model of the economy were modern jargon, the incentive/revelation issues are ignored’.

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 8 involving the problem of credible this argument on the grounds that in a precommitment on the part of the state’ to competitive environment, efficiency is a non—intervention in the competitive process or prerequisite for survival. Once again what else the separation of ‘the political from matters is not so much ownership but economic criteria in decision making’ is added competition. What is important, in this respect, to the information and agency problem is the commitment problem facing the (Bardhan and Roemer, 1993, p. 11). government. In other words, the problem of 26. Both Stiglitz (1995) and Roemer (1993) ‘commit(ting) itself to competition, to identify the problem of incentives as the key hardening budget constraints, not to subjecting reason for the failure of socialism in Eastern the enterprise to political pressure, and not to Europe and a fundamental flaw of early market subjecting it to civil service requirements’ socialist models.15 However, they consider false (Bardhan, 1993; Putterman, 1993; Stiglitz, the implication that many draw from this, that 1995, ch.6). all that is needed for the restoration of 28. Where early market socialist models have incentives is the restoration of private property. got it right, is in their implicit recognition of the For one thing, the problem of incentives and absence of futures markets for coordinating monitoring is not confined to socialist models. investment decisions. This absence can be the Large corporations under cause ‘massive coordinating failures’, leading also suffer from serious incentive problems. to excess capacity in some industries and This is related to the well— known issue of shortages in others. The way early market what Berle and Means (1932) have called the socialist models tried solve this problem separation of ownership from control.16 theoretically, is by allowing the government to 27. The question of incentives, however, is not play the coordinating role by directly confined to the management level. In relation to controlling the level of investment (Stiglitz, non—private (publicly) owned enterprises the 1995, p. 9). By doing so, however, they failed question has been raised as to whether those to take into account the information problem who run publicly owned firms have the associated with the allocation of capital.17 incentive to implement incentive structures and 29. The more serious implications of the new be concerned with efficiency. Stiglitz dismisses information critique of the working of markets and of the standard neoclassical explanation of

15 Roemer’s position on the causes of the collapse has since it, is that in the presence of imperfect shifted, emphasising more the lack of competition with the information markets will always be imperfectly consequent lack of incentive for innovation as the main factor competitive. At the same time, the absence of a (see Roemer, 1994, ch.5). 16 In large corporations, the argument goes, the costs of full set of markets and in particular the absence acquiring information have given management considerable of futures and risk markets can lead to autonomy from the shareholders in their decision—making. coordination failures which can in turn cause This creates two related problems: on the one hand, the financial incentive of managers in large corporations is very markets (such as the labour and money weak, since managers appropriate only a small fraction of the profits. On the other, the discretion that managers enjoy in their decision—making gives rise to serious monitoring problems. 17 Stiglitz makes the distinction between old market failures Given the stock market’s inefficiencies and the diffusion of the (public goods and externalities) and new market failures property rights of firms to many small shareholders, the main associated with imperfect and costly information and existing control mechanisms (takeovers via the stock market incomplete markets. Although the former can be relatively and shareholder voting) provide, according to Stiglitz, only easily be identified and corrected with appropriate government limited control over management. At the same time he also action, the latter applies to virtually all markets making them considers the stock market as highly ineffective as a device for pervasive in the economy. The conclusion is that this raising capital. In both respects, Stiglitz considers the banking pervasiveness reduces not only our confidence in the efficiency system as offering a much more effective control mechanism as of markets but also in the ability of to take care of well as an effective fund raising device (see Stiglitz, 1985). them (Stiglitz, 1995, ch.3).

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 9 markets) not to clear thus leading to new information critique, is that for any market unemployment and to credit rationing. socialist model to be credible, it has to tackle Relatedly, in the absence of a well functioning these problems explicitly. This indeed has been coordination mechanism the is the prime aim of the new models of market likely to exhibit dynamic instabilities leading to socialism proposed by Bardhan and Roemer economic downturns (ibid, ch.2).18 and others. It is to these new models that we 30. What is striking, is that all this talk is now turn. conducted in terms of the properties of models. The target of Stiglitz’s critique is not real IV. MODERN VERSIONS OF MARKET market socialism as such, not even Lange’s SOCIALISM model of market socialism. It is mostly a critique of Lange’s underlying framework of 32. The aim of modern versions of market analysis: the Walrasian general equilibrium socialism has been twofold: to achieve the framework. What Stiglitz does, is to take this goals of the original market socialist models theoretical system, change two of its basic (i.e. to combine efficiency with equity) while at assumptions (perfect information and the the same time avoiding the problems of the existence of a full set of markets) and then try original models as identified above, especially to identify the consequences of this new set of those addressed by the new information assumptions for the model. This way, however, paradigm. More concretely, Roemer’s and the debate becomes totally divorced from Bardhan’s attempt has been to take explicitly reality. At the same time, the method employed into account the incentive and monitoring (model building) remains the same, as is the problems left untouched by general equilibrium general frame of reference – neoclassical theory theory and early market socialist models. The (Hodgson, 1999b, pp. 36—7). basic question they try to answer is ‘whether a 31. Based on this critique, Stiglitz’s own version of market socialism can be designed conclusion is that the market socialist project is that works about as efficiently as capitalism but not viable. Instead he proposes a sort of with better distributional properties’ (Roemer, ‘people’s capitalism’ with significant 1995, pp. 120). Or, more specifically, ‘can government role both in providing public goods competition between business enterprises, and taking care of externalities as well as in leading to innovation, be induced without a influencing private investment. At the same regime of private property in the means of time he favours a system of monitoring based production?’ (Roemer, 1994, p. 45). on the banking system and not the stock market 33. There are four basic touchstones on which (the Japanese/German bank—centric system modern market socialist models are built. First, rather than the Anglo/American system based is the belief that the Soviet system failed on the stock market) (see also Roemer, 1995). because of the abrogation of markets and the The more general implication, however, of the consequent absence of competition and lack of incentives. Particular emphasis is laid in this 18 This, of course, is hardly a new discovery by Stiglitz and the new information camp. Dobb (1969, pp. 147—9), for example, respect on the role of competition in promoting arguing from a Marxian perspective made a similar point a few innovation as well as in the fact that, in this decades ago, when he argued that in the absence of future prices view, the Soviet experience has completely and the uncertainties associated with it, the result will be chronic instability with excess capacity emerging in some discredited direct planning as a mechanism for sectors and bottlenecks in others. So there is not even ‘a prima allocating resources (Roemer, 1994, ch.5, p. facie case for regarding long—term investment under free 125). market conditions as optimal’ (ibid, p. 149). For a similar critique of the functioning of markets see Estrin and Winter 34. The second pillar is provided by certain (1989, pp.105—115). recent developments in capitalist countries

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 10 (which Roemer calls ‘concessions of profit maximisers and economic inefficiency capitalism’) which, according to this view, can will result. This represents what Kornai has be used for ‘designing the next step of socialist termed the ‘soft budget constraint’ (Kornai, experiments’. These include, first and foremost, 1986a; Bardhan and Roemer, 1993, p. 6). its ability to solve complex agency problems in 37. The last touchstone of the modern market face of the separation of ownership from socialist endeavour is a theoretical one. It control in modern corporations and the concerns recent developments in new concurrent diffusion of profits to many small information economics we have already shareholders. referred to, especially the incentive 35. Other developments of interest for the compatibility literature and the principal/agent socialist project include the Scandinavian theory of the firm. model of social , which has shown 38. Built on these pillars, the new market that it is possible to have a more equitable socialist proposals, despite their differences, distribution of income without important losses have certain common attributes that also in efficiency (ibid, ch. 4). Yet further, there is distinguish them from earlier market socialist the success of China’s township and village models. These attributes include, first, the enterprises (TVE’s) and the Montragon group existence of real markets and competition not of in the Basque region, which only for consumer goods and services and prove that private ownership and the clear labor, but also for capital. In opposition to delineation of property rights is not a necessary earlier models, in these proposals all prices prerequisite for efficiency and growth, as (including those of capital goods) are set by real Hayek, Kornai and the property rights school functioning markets without any state have argued (ibid, ch.15). At the same time, the interference. In addition, late models have Japanese keiretsu provides a good example of a completely dispensed with state ownership device (bank monitoring) that can be used to having replaced it with some form of public monitor the managers. Other non—market ownership where either the workers themselves institutions include ‘the firm, contract law, the and/or other institutions (banks, mutual funds, interlinking institutions between economic and other firms etc.) share the ownership rights. other actors (such as the firm and its 39. The central theme lying behind these stockholders), and the state’ (Roemer, 1994, p. models is that the driving force of the 3). As far as the latter is concerned, the growth dynamism exhibited by modern economies, i.e. in the share of the in most the basic cause of their efficiency, lies not so developed countries together with the East much in their property relations but in other Asian growth miracles where the state played a attributes and institutions of modern economies leading role, both help to prove that extensive such as the existence of markets themselves and government involvement in the economy is not inter—firm competition (Bardhan and Roemer, necessarily concomitant with inefficient 1992, p. 101). They do recognise, however, outcomes, as long as it does not interfere in the that, in the absence of private property to competitive process. impose financial responsibility on firms, there 36. This last point brings us to the third pillar of arises a strong incentive problem in relation new generation models, which is that state both to the ownership and the management of ownership cannot work effectively. Here, these firms. These twin problems of Kornai’s and Hayek’s point has been accepted competition and incentives represent the basic that as long as governments interfere in the questions that modern market socialist models competitive process, firms will not be held try to address. financially responsible, managers will not be

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 11 40. So what are the basic coordinates of these turn, purchase shares of firms. People can only models? With respect to their property rights trade shares with shares or buy and sell shares they can be divided into two groups: the at coupon prices. But they cannot sell shares for labour—managed and the managerial models of cash. Thus a coupon stock market is created market socialism (Roemer, 1994, ch.6). In the were the movement of coupon prices gives former category, which includes firms that are signals to agents as it does in the capitalist either worker—owned or labour—managed and stock market. in which the workers themselves elect a 43. The chief question that these models try to manager to run the company, belong the models address is how to give proper incentives to proposed by Estrin (1989), Schweickart (1992, managers. Firms are assumed to be profit 1998), Weisskopf (1993, 1994), Fleurbaey maximising institutions run by selfish (1993) and others. In the latter category the managers. In the absence, however, of private property rights are assigned either to various ownership and given the wide dispersal of institutions such as banks, mutual funds, other profits in these models, the question is how are firms etc. or to shareholders under a specially firm managers going to be monitored? In designed coupon capital market. In what Bardhan’s (1993, p. 145) words, ‘(h)ow to follows we concentrate exclusively on the motivate the managers of public firms to managerial model of market socialism and maximise profits, to get them involved in especially on the proposals by Bardhan and rivalrous entrepreneurial processes, and to Roemer (see Bardhan 1993; Roemer, 1993; separate political from economic criteria in 1994; 1995; Bardhan and Roemer, 1992; 1993). decision making concerning those firms — In both proposals firms are profit maximising these are the central issues any model of institutions run by a manager who is appointed feasible market socialism has to address’. by a board of directors who, in turn, are elected 44. The solution to this problem is sought in the by the institutions or individuals who own the different systems of control and monitoring company. Where the two models depart is in developed under corporate capitalism in order their assignment of the firm’s property rights. to tackle similar agency problems in face of the 41. Bardhan’s bank—centric model is built separation of ownership from control. These after the Japanese keiretsu system. Firms are include, first, or tightly held control (this divided into financial groups formed around a is applicable only to small firms), second, the main bank, which is owned by the state and threat of takeovers via the stock market (the other banks and financial institutions. They are Anglo—American system) and, third, the joint stock companies with their shares owned control of managers by large organisations such by their own workers, by other firms in the as banks and pension funds (the German and same financial group and by the main bank and Japanese system) (Roemer, 1995, p. 123). other institutional . The firm itself 45. In view of Stiglitz’s critique of the owns shares in other companies of the group efficiency of the capitalist stock market as a and the dividends received are distributed to its monitoring mechanism in the absence of a full workers. set of markets, and of the belief that in the 42. In Roemer’s model, on the other hand, absence of private property it is difficult to property rights are assigned to citizens through reproduce the capital market, the two writers try a voucher scheme that gives them the right to a to find alternative ways for monitoring the claim in profits. Citizens can either be managers. Bardhan, as we have seen, favours a distributed an equal number of vouchers and bank—centric system where banks act both as then use them to buy shares or alternatively the chief fund raising device and as well as the they can buy shares in mutual funds which, in main control and monitoring mechanism. Here

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 12 the agency problem is solved through the main associated with some forms of investment and bank and the other group members having a of public goods, as well as the absence of greater stake in, as well as information about, futures markets, make state intervention in the the company than ordinary shareholders. In economy and some form of planning necessary. addition, being the main source of capital for As Roemer (1994, p. 21) puts it, ‘the political the firms of the group, it has an incentive to control of the investment process is important monitor them effectively to make sure that they because market failures of a conventional kind are able to pay back their loans but also in order make it preferable’. As far as this planning to retain its reputation of credibility among process is concerned, Roemer with his other main banks (Bardhan, 1993). collaborators, drawing on the experience of 46. In Roemer’s model, on the other hand, the France and of the Ministry of Trade and coupon stock market is supposed to serve the in Japan and using a Walrasian general same functions as the money stock market equilibrium model, favour chiefly some form of under capitalism (giving signals to agents and using interest rate discounts disciplining the managers through the take— and surcharges as its principle instrument over threat) except one: the fund raising (Roemer and Silvestre, 1993; Roemer, 1993, function. The latter is again performed by the pp. 94—5; 1994, ch.12). In addition, state banking system. Given the inefficiency of stock intervention is required in order to create public markets as a monitoring mechanism, Roemer goods, to compensate for incomplete markets, combines his coupon system with Bardhan’s to take advantage of positive externalities from bank—centric keiretsu model, where the main investment, to take welfare—state measures source of equity is again the main bank, which especially with respect to unemployment which also serves as an additional monitoring device. will continue to exist and also to take measure So, in Roemer’s model, the agency problem is for a further redistribution of income (Roemer, solved both through the (coupon) stock market 1994, ch.11). and through the banking system. Such a scheme 48. It should be noted that, as in Lange’s and has, according to Roemer, several virtues. First, Stiglitz’s case, the new generation market it prevents the concentration of ownership in socialist project is once again conducted in the hands of a small class of citizens. Second, it terms of models. It simply represents an attempt provides the same signals as the capitalist stock to revisit market socialism in light of incentive market does. Third, ‘it involves probably the compatibility theory. And even when reference smallest change from actually existing is made to real institutions, this is done in an capitalism, and therefore it perhaps has the arbitrary and ad hoc way and through the prism largest probability of running as efficiently as of what they want to prove. In what might be capitalism does’. Last, the layer formed called a ‘stamp collecting approach’, between the firms and the state by intermediate protagonists of new market socialism engage in equity—holding institutions and the main bank, a process of randomly and arbitrarily picking up ‘acts as a buffer against direct political capitalist institutions which can presumably be accountability’ (Roemer, 1993, pp. 110—2; used to ‘design the next step of socialist 1994, pp. 50—1).19 experiments’, while dispensing with the 47. As far as investment is concerned, the institutions they consider counter to this aim. presence of positive and negative externalities These institutions, however, rather than being seen as the result of deeply rooted historical

19 processes, are treated superficially as simple Here the problem of main bank independence from empirical facts which can be replicated at will. direct state control also becomes crucial. A proper reading of Japanese ,

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 13 for example, suggests a much broader 51. scope 50. Even if one overlooks the problematic than that provided by incentive compatibility nature of the approach, the question still within and between keiretsu.20 remains whether these models, seen in their 49. This is, in fact, a general attribute of an own terms and through the prism of their own approach that reduces rich historical and proclaimed goals, have managed to meet the analytical issues to either trivial properties of challenge presented by the critiques of the models or empirical ad hocery. On the other earlier models, and to overcome the problems hand, it is quite ironic that two of the examples and the contradictions associated with these Roemer picks up, Scandinavian social earlier models. It is to these questions that we democracy and the East Asian growth miracles, now turn. have both collapsed in recent years and can therefore no longer be invoked so readily as V. NEW MARKET SOCIALISM: A prototypes on the basis of53. which the new CRITIQUE FROM WITHIN socialist project can be erected (see also Gray, 21 1995). Further, the contention concerning the 51. Seen in their own terms, the new generation separation of ownership from control in modern models suffer from one fundamental enterprises has been heavily contested from contradiction: on the one hand, they want to many quarters on both theoretical and empirical allow real markets and competition in their grounds (Brus and Laski, 1989, p. 133). models to function freely. On the other hand, however, they use the neoclassical model,

20 The Japanese keiretsu system has been selected as the which incorporates a highly problematic notion prototype on the basis of which the monitoring devices of the of markets and competition, as their underlying models under investigation have been designed. However, the framework. What they do not realise, is that by way their adherents have treated this institution is not only superficial but also erroneous. They overestimate the doing so they cancel the very aim for monitoring function of banks in promoting innovation by constructing these new generation models neglecting other institutional factors such as the life—long which is to imitate the dynamic efficiency employment system, the wage/ promotion system and the formation of trade unions at the company level, which have all properties of the market economies but with helped to enhance workers’ loyalty. These factors together with better distributional features. For one thing it the team system at the work place, the promotion of multi— does not allow the architects of the new models skills through learning by doing and the formation of an intra firm labor market have all contributed to the enhancement of to go beyond the original Lange model in this the workers’ incentive to work (Itoh, 1995, pp.127—8). At the respect. As such their proposals are vulnerable same time, the extensive use of the system of sub—contracting to most of the criticisms that have been leveled by the keiretsu gives large firms the power to lower costs by exerting continuous pressure on smaller firms. Last, the role of against the original model. state commitment in producing the Japanese miracle should 52. Take the example of the concept of also be explicitely acknowledged. On the other hand, Bardhan competition so much relied upon in order to and Roemer tend to idealise the system by neglecting all its negative features such as the ‘notoriously long working hours’, reproduce the efficiency properties of the the ‘syndrome of chronic fatigue’, the ‘sharpest discrepancy market system. Roemer treats prices as between rising productivity and stagnant wages’, ‘the endless parametric thus adopting the neoclassical notion corruption scandals’ etc. (ibid, pp.127—8, pp.137—9). All this does not mean that one cannot draw useful conclusions from of competition as passive price taking this experience, only that it has to be treated in its proper social behaviour. This notion, however, has, as we and historical context and be analysed through all its historical have seen, come under heavy fire from all and socio—economic parameters. 21 Not everybody agrees with the contention that Scandinavian quarters, for its total inability to capture the true has collapsed. For some people it has simply nature and essence of the competitive process. successfully adapted to new circumstances. Whatever the way Yet it is reproduced in models that supposedly one chooses to see the matter, however, it still remains true that Scandinavian social democracy in its traditional form no longer want to capture exactly the aspects of exists.

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 14 competition left out by the neoclassical models mostly want to replicate. What is much definition, especially its dynamic nature. more relevant for meeting this objective is not 53. Yet further, there is the role of static allocative efficiency, but dynamic entrepreneurship, a factor so much emphasized innovative efficiency which, however, is not by the Austrian school but left completely captured by the neoclassical framework. Such a untouched by market socialist proposals. In all conception of efficiency captures the dynamic market socialist models that adopt the static aspects of market competition in a more general equilibrium framework, individuals are satisfactory way as it is directly related to the treated as optimizing agents who behave issue of productivity and technological according to certain rules, either explicitly, as in innovation – the process of ‘creative Lange’s case, or by implication through destruction’. This latter issue of innovation is accepting the Walrasian framework as in the also left untouched by the standard neoclassical case of Roemer. Entrepeneurs are simply model, which assumes technology to be treated as behaving ‘like robots, minimising exogenously given. Not only that, but the costs and maximising profits with the data neoclassical model is also ‘fundamentally given’ (Brus and Laski, 1989, p. 57). This way, inconsistent with incorporating technological however, the true function of entrepreneurship, change’ (Stiglitz, 1995, p. 140). which is to capture the opportunities in a world 56. However, even if one accepts Pareto of uncertainty before anybody else does, is optimality as the main criterion of efficiency, completely lost. the presence of asymmetric information and the 54. The same is true for the way neoclassical absence of a full set of markets, as Stiglitz has theory treats the question of efficiency. This is argued, make market failures pervasive in the defined as static allocative efficiency using the economy and this causes all markets to be criterion of Pareto optimality and refers to the necessarily inefficient. Given that the market efficient allocation of scarce resources to socialist models solve none of these problems, alternative uses, assuming the technology is the same criticism also applies to these models. exogenously given. Such a criterion of 57. Stiglitz’s is a critique not only of the efficiency, however, is highly inadequate for Walrasian framework of analysing markets but the purposes of constructing market socialist also of the actual functioning of markets models of the new generation type for two themselves. This in opposition to the Austrian reasons. It is inadequate as a guide to achieving side, which, despite being a more thorough socialist objectives because, as Roemer (1994, critique of the neoclassical framework, p. 145; 1995, p. 113) himself rightly argues, considers the markets to be the natural and most Pareto optimality might be a good criterion effective way to organise the economy.22 from a purely economic point of view, but it suffers from social myopia: it takes no account 22 Roemer (1995, pp. 121, 113, 117) himself fully accepts the validity of these criticisms, but he then simply bypasses them of issues of distribution and justice. It treats by failing to treat them in any theoretically consistent manner. these issues as separate from the question of In fact, his response to these problems is pragmatic. Given the efficiency. Such a presumption, however, in existence of these problems, he argues, architects of market socialist models must answer two questions: first, ‘granted that addition to being counter—factual, is hardly of real market economies are not perfectly described by the any use for constructing models whose explicit Walrasian model, is the approximation...good enough to permit aim is to combine efficiency with a one to use the lessons of the model to design a version of market socialism?’. Second, ‘granted that real market redistribution of income. economies (including market socialist ones D.M.) are 55. is also inadequate as a characterised by an incomplete set of markets, asymmetric concept for capturing the dynamism of markets, information, and ’ giving rise to equilibria which are not Pareto—efficient, ‘can one create an economy the attribute of capitalism new generation that is about as efficient as capitalism, yet has qualitatively

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 15 58. Summarising, new generation models, generation models. The result will most despite their attempted reconciliation of the certainly be huge market inefficiencies in the absence of private ownership with the presence form of non—clearance of markets and the of some form of capital markets and their wastage of resources this brings about. Chief explicit treatment of the question of incentives example is the presence of chronic and monitoring, fail in two of their principal unemployment, which Roemer (1994, p. 90) objectives. They fail to go beyond the original himself admits will continue to exist in new Lange model as far as their underlying generation models.23 framework is concerned and, second, they fail 60. Another example of market inefficiency to meet effectively the challenge presented by resulting from individualistic investment the Austrian and the new information critiques decisions and the absence of future prices, is the of early market socialism, save for the question existence of non—optimal rates of investment. of incentives and monitoring. Lange did somehow take care of this problem 59. Another problem associated with new by allowing the rate of investment to be generation models is, as we have seen, that determined ‘corporately’, thus helping to although they allow real markets and reduce the problem of uncertainty and the competition to function freely, they refuse to instability associated with it and to alleviate the take into account their full consequences. In problem of unemployment, always, of course, particular, they concentrate almost exclusively remaining within the strict boundaries of his on questions of microefficiency, failing to treat model. Roemer, on the other hand, despite in any theoretically consistent manner the allowing for some form of indirect (indicative) macrostability problems associated with the planning through the use of interest rate operation of free markets. The combination, discounts and surcharges, lets the rate of however, of what Dobb has called ‘atomised investment in his model to be determined, in decision making’ with the absence of futures principle, by the individual investment and risk markets to coordinate investment decisions of firms.24 Thus all the problems decisions, creates an environment of associated with individual investment decisions uncertainty, which can lead to ‘massive – uncertainty, instability, non—clearance of coordination failures’. In the absence of a well markets etc. ⎯are also reproduced in his functioning coordination mechanism, the model. More generally, in contrast to Lange for existence of excess capacity in some sectors is whom the macrostability problems were a combined with bottlenecks in other sectors major concern, in Bardhan and Roemer’s leading to chronic instability and economic proposals these problems do not feature at all. fluctuations (Dobb, 1969, p. 148). Yet these problems of instability, coordination and long 23 Roemer (1995, p. 127) resorts to traditional Keynesian type term growth, hardly feature at all in new of government intervention in order to take care of this problem. 24 When Roemer (1994, p. 21) calls for the ‘political control of better distributional properties?’ (Roemer, 1995, pp.120—1). the investment process’, he presumably has this indirect form of Roemer’s answer to the first question is that in the absence of planning in mind. He calls this ‘the Lange mechanism’ (Roemer any alternative that takes into account the Stiglitzian criticisms, and Sylvester, 1993: Roemer, 1994, ch. 12). Thus, he there is no substitute to using the Walrasian model, despite its misleadingly interprets Lange as simply advocating some form deficiencies, for constructing market socialist models. Much of indirect planning through the use of the interest rate. It is, like Newtonian physics in the absence of the Einsteinian model. however, quite clear, that Lange advocated the determination of So the conclusion that is easily drawn is that Roemer’s (and the rate of accumulation directly by the Central Planning Board Bardhan’s) models of market socialism do not even attempt to (Lange, 1936, pp. 84—5). In fact, contra Roemer, he explicitly meet either the Austrian or the Stiglitzian criticisms (with the rejected leaving such an important decision in the hands of exception, of course, of the issue of incentives) although they individuals, since, as he puts it, ‘this is scarcely compatible with fully, in the case of Stiglitz, and, partly, in the case Austrians, the organisation of a socialist society’ (ibid, p. 85). See also accept their validity. note 6.

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 16 In this sense it could be said that new unemployment and the wastage of resources, generation models have regressed relative to dynamic instabilities, non—optimal rates of early ones. investment etc) will continue to exist. As such, 61. Competition, a factor so much relied upon modern market socialist models represent to reproduce the efficiency of free markets, is typical examples of the use of radical means not, of course, free of vices. For one thing, the (abolition of private property) for the competitive process creates winners and losers accomplishment of moderate and uncertain thus continually generating inequalities. This ends. way, however, the very aim for constructing these models, the achievement of a more VI. TOWARDS A MORE RADICAL equitable distribution of income, is cancelled. CRITIQUE As such the model is self—defeating as far as the only socialist objective it has been designed 63. According to Roemer (1994, p. 51) ‘the to achieve is concerned. In addition, rivalrous principal advantage of (his) model is that it competition as the motor of the socialist involves probably the smallest change from economy can hardly be aligned to socialist actually existing capitalism, and therefore it objectives. This is even more so since, as perhaps has the largest probability of running as Roemer (1994, p. 117) himself puts it, efficiently as capitalism does’. The question, ‘competition in the economic sphere engenders however, is, in the presence of the profit interpersonal competition as a more generalised maximisation motive, the full operation of free phenomenon in society’. As such, it creates markets and competition, the absence of state alienation and promotes the erosion of ownership and state interference in the and the sense of collectivity (ibid; competitive struggle, what is it that makes these 25 Adaman and Devine, 1997). models socialist?26 Could it be the case that, as 62. In sum, Bardhan and Roemer’s proposals Bardhan and Roemer (1993, p. 8) put it, with seem to offer an uneasy compromise between, modern market socialism ‘socialists have made on the one hand, accepting the neo—liberal all the concessions… (only)… to be followed position as far as the virtues of free, by the universal recognition…that only a unobstructed competition, the need for system of conventional private property yields a economic actors to be held financially satisfactory combination of dynamic efficiency, responsible for their actions and their treatment equity and freedom’? of these economic agents as ‘unabashedly self 64. Before we embark on this investigation, let interested and selfish people’ and, on the other, us first clear away a misconception, with promoting some socialist objectives via the regard to the relationship between the Austrian abolition of private property. However, and the new information critiques. According to although it is by no means certain that in the Roemer (1995, p. 114), ‘Stiglitz’s criticism of absence of private property the efficient the Walrasian world—view is Hayekian’. properties of the market can be replicated, it is Indeed, at first sight, it looks as though these beyond any reasonble doudt that all the vices of two critiques of early market socialism models free markets (generation of inequalities, chronic 26 Roemer’s answer to this question draws attention to the non—private ownership rights in firms, to the more equal 25 Roemer’s response to the problems associated with the distribution of profits and, last, to the existence of some form of existence of competition is once again pragmatic: since ‘we planning in these models in order to justify their socialist know of no mechanism that can produce an innovative nature. None of these attributes of his model, however, with the economy except inter—firm competition,…it follows that we exception of the first one, represents peculiarly socialist must restrict our investigation to models based upon such institutions. Both the latter could be achieved within a capitalist competition’ (ibid, p. 121). framework.

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 17 share some common ground. In particular, both 66. What both writers ⎯Hayek and Stiglitz critiques question the validity of the perfect ⎯fail to recognise is one very important information/ perfect knowledge assumption parameter of knowledge: its social dimension. underlying the neoclassical premises of early On the one hand, knowledge may not (but also most modern) market socialism necessarily be individual in character, as Hayek models. On closer inspection, however, it has argued. Often, for example it is held by proves otherwise. Stiglitz shares with groups of workers rather than individual neoclassical economics the notion of entrepreneurs (Wainwright, 1994). However, information as objective knowledge. Given this, even when it is individualistically held, it still he questions the assumption of perfect has an equally important social dimension: it is information on the grounds that it does not socially constructed. This is true in two senses: reflect the actual working of a modern economy first, the interpretation/ conceptualisation of the which is necessarily governed by asymmetric information received by the human mind information. The chief reason for the existence necessarily involves value judgements (in the of asymmetric (imperfect) information is that it form of assumptions, theories etc.) that are can be transferred (obtained) only at a cost. In socially constructed. As Hodgson (1988, p. 7) other words, for Stiglitz, ‘imperfect information puts it, ‘(w)hilst it can be accepted that refers to the known—to—be—available information and knowledge have important information which is costly to produce’ subjective and individual features, the concepts (Kirzner, 1997, pp. 64—5). and theories that are used in their acquisition 65. Hayek, on the other hand, did not simply are not, and cannot be, purely subjective, as if question the assumption of perfect knowledge they resulted from an isolated individual’.28 in neoclassical theory. The target of his 67. At the same time, as Marx has persuasively criticism was the very concept of knowledge shown, the market process is a deeply social itself. In his conception, as we have seen, process involving chiefly the relationship knowledge does not refer to objectively given between people. In this sense then, the data that can be acquired and transferred to information/knowledge generated in this anybody, but to the subjectively—held process, which is the focus of attention of the ‘dispersed bits of incomplete and frequently Austrians, is also necessarily social in contradictory knowledge which all the separate character. As Wainwright (1994, p. 58) has individuals possess’ (Hayek, 1945, p. 77). In argued, recognition of this fact would have other words, there is a conceptual difference serious consequences for Hayek’s view of the between Stiglitz’s notion of asymmetric information as objective knowledge obtained at reaction in the debate (see Hayek 1935; 1940) and not his more a cost and Hayek’s concept of tacit knowledge, general attack as consolidated in his other writings (e.g. Hayek which is subject to discovery through the 1937, 1945, 1947) where he advances his major contribution on the subjective nature of knowledge and of competition as a competitive process (see Kirzner, 1997, pp. discovery process. 64—5; Caldwell, 1997; Ioannides, 1992, ch. 3; 28 Hodgson (1988, p. 6; 1999b, p. 46) makes a useful distinction Adaman and Devine, 1997, p. 63, note 30).27 between sense data, information and knowledge. He defines sense data as consisting of ‘the vast jumble of aural, visual and other signals that reach the brain’. Information, on the other 27 Roemer is not alone in regarding Stiglitz’s critique as hand, is data to which some meaning has been attributed. For Hayekian. Stiglitz himself seems to share this view. Whenever this, ‘it is necessary to impose a conceptual framework on the he refers to Hayek’s work, his assumption seems to be that jumble of neurological stimuli, involving implicit or explicit Hayek shared with him the notion of knowledge as objectified assumptions or theories which cannot themselves be derived data, while also having a similar concern to him with imperfect from sense data alone’. Last, knowledge is the product of information (see Stiglitz, 1994, pp.9—10, 24—6, 43—4; information use, while tacit knowledge, in the Hayekian sense, Kirzner, 1997, pp.64—5). Roemer (1994, ch. 4), on the other is knowledge ‘which cannot be readily codified in the form of hand, seems to take into account only Hayek’s immediate information that can be passed on to others’.

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 18 market process as a spontaneous order. The any other specifically socialist institutions that same is true for his total rejection of the would help in materialising any other socialist possibility of an efficient economic system not objectives. based on private property and market 70. The philosophical underpinnings of such a competition. If knowledge is socially position are provided by the egalitarian theories constructed, then, contra Hayek, this could of justice in political philosophy as inspired by provide the basis for collective action. Further, Rawlsiam moral philosophy. This tradition is it becomes theoretically possible to devise an mostly associated with egalitarian liberalism economic system based on different principles rather than socialism, giving emphasis, as and institutions to create a mechanism of Roemer does, mostly to issues of distribution information generation and dispersal as rather than social property relations (Roemer, efficient as the market mechanism (see 1994, ch. 3).29 This position of Roemer derives Wainwright, 1994, pp. xii, 57—61, 106—8 directly from his earlier writings on analytical passim; Sciabarra, 1995, pp. 109—116). where property relations are treated in 68. In addition to the social dimension of a purely juridical and superficial fashion as knowledge, which is not treated by either simply involving the distribution of ownership neoclassical or Austrian economics, there is the rights rather than as incorporating specific question of the information that the market social relations (Roemer, 1982; 1988, pp.131— actually conceals (McNally, 1993, p. 199). This 5; 1995, p. 15). concerns information about the social effects of 71. In new market socialist proposals, as we market transactions, which the market have seen, both capitalism and socialism are mechanism is totally incapable of providing. treated as models rather than as social systems This necessarily leads to social inefficiencies. of production. What Bardhan and Roemer do is 69. The absence of the social dimension in the to build two alternative models, one for treatment of information and knowledge is capitalism and one for socialism and then, by complemented in Roemer’s case by a comparing them, pronounce judgements as to reductionist definition of the concept of which has better efficiency and distributional socialism. As we have seen, the basic question properties. All this is done on the basis of the that new generation market socialists try to same underlying framework by simply answer is ‘whether a version of market changing some of the assumptions. In this socialism can be designed that works about as respect, Bardhan and Roemer’s proposals are efficiently as capitalism but with better once again built on the same methodological distributional properties’ (Roemer, 1995, p. ground as Lange. In fact, what is striking, is 120). Such a delineation of the central that most of the debate on market socialism objectives of socialism is derivative upon the (with the exception of Hayek and Dobb) has idea that ‘socialism is best thought as a kind of been conducted in these terms. From Lange’s ’ giving emphasis on a more model, to Stiglitz’s critique to Bardhan and equitable distribution of income rather than ‘the Roemer’s proposals, the chief concern has been implementation of any particular property the construction of models, which are treated as relation’ (ibid, pp.124—5). The change in the ideal, ahistorical constructs with universal latter is thus viewed in a purely instrumental validity. In this way all historical and social fashion, as a tool for bringing about a more context is lost and the theoretical reproduction equitable distribution of income and is not associated with any notion of socialism as a social system of production (Gray, 1995, p. 29 See John Rawls’ A Theory of Justice. Other exponents of this tradition include Ronald Dworkin, Thomas Nagel, and G.A. 147). Further, no explicit reference is made to Cohen (see Roemer, 1994, ch. 3; Gray, 1995).

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 19 of reality is simply treated as an exercise in economy…are not bearers of specific histories, model building. members of any particular culture or 72. The only difference in Bardhan’s and community; they are the ciphers of standard Roemer’s proposals, is that their model is economic theory and of Rawlsian moral constructed by taking into account the philosophy’. All structural and collective conclusions drawn from the incentive factors affecting social behaviour are totally compatibility literature. As they put it, ‘the absent. If, however, one is to get from recognition of the problem of incentive individual choices to historical processes, the compatibility injected a new element into the intermediation of structural factors is theory of the market with important corollary indispensible (Wood, 1989, p. 87). Economic insights concerning the utopian nature of processes are objective social processes where Lange’s proposals’ (Bardhan and Roemer, structural factors assume central importance. In 1993, p. 7). Despite, however, their addition, the fact that the behaviour of protestations to the contrary, the fact of the individuals is shaped by social institutions has matter remains that their proposals represent no to be explicitly taken into account. This way the more than a simple extension of Lange’s to take individual action is located within its historical into account incentive problems. They do this and social context and individual motivation simply by changing some of the assumptions of becomes a function of structures and collective the model. Everything else ⎯methodologically interests. As Heilbroner and Milberg (1995, p. and substantively ⎯remains the same. 8) put it, ‘the recognition of the inextricably 73. On a methodological level, new market social roots of all social behaviour leads to the socialists share with Lange, but also with view that macrofoundations must precede Hayek, the methodological individualism and microbehaviour, not the other way around…’. subjectivism inherent in both neoclassical and In other words, structure takes precedence over Austrian economics. Methodological agency at the level of the individual and the individualism, in turn, is necessarily associated social is incorporated into the analysis as a with reductionism since it attempts to explain point of departure rather than emerge as a the whole through its analytical reduction to its consequence of the actions of individuals. This presumed microfoundations and component does not mean that individual behaviour is parts (Hodgson, 1999a, p. 61). This way, totally determined by these collectivities. Only however, the whole, rather than constituting an that individual action is necessarily filtered object of study on its own right, becomes a through and conditioned by these structural and 30 mere aggregation of its component parts. social factors and institutions. 74. This individualist methodology is complemented by the total divorce of the economic from the social: both are understood 30 Take the example of competition. Rather than representing in terms of the actions of individuals. In other price taking behaviour on the part of rational individuals, it words, structures are explained in terms of represents the rivalrous and antagonistic process which, rather individual motivation (Howard and King, 1992, being the result of some universal chracteristic of human nature (optimising behaviour for neoclassical theory, entrepreneurship pp. 344—51). Moreover, in treating individuals for the Austrians), represents the historically specific result of simply as ‘unabashedly self interested and the imperatives of the capitalist market. As Wood (1989, p. 87) selfish people’, all historical and social context puts it, competition is a result of ‘the whole historically constituted social structure which has made individuals in is lost and human behaviour is treated in a capitalist society dependent on the market for the conditions of universalistic, ahistorical and asocial fashion. their self realisation, and hence subject to the imperatives of As Gray (1995, p. 149) puts it, ‘human subjects competition and accumulation’. Capitalists must accumulate if they want to reproduce themselves as capitalists (Roberts, 1986, who figure in the model of a market socialist pp. 176—7).

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 20 75. A direct corollary of the absence of analysing and explaining issues that have structural and social factors from Roemer’s traditionally been thought as lying outside the analysis is the total neglect of the issue of social scope of mainstream economics, using the tools transformation. In fact, it is not at all clear that of neoclassical economics. This process of advocates of this system realise the huge social colonisation has evolved in two principal transformation that the change in the form of directions. One is the attempt to analyse they envisage, entails. And even if phenomena and institutions (family, crime, they do, they nowhere make explicit the social addiction etc.) in terms of the optimising and political forces that would bring this huge individual. Gary Becker has played a leading transformation in the economic structure about. role in what has been described as the ‘as if This is a direct result of the absence of the market’ approach, where social phenomena are concepts of power and conflict in these models. treated as if they were perfectly competitive In fact, there are hardly any hints as to how markets (see for example Becker, 1993, 1996; such a transition would come about, while there Fine, 2000). are neither any links identified between 77. The second direction concerns the process capitalism and socialism that would supply the of internal colonisation of areas of economics material conditions for such a transition. In this previously considered as the privileged fields of respect, there is a logical gap in most market non—mainstream traditions in economics such socialist models. Without such a link, however, as , segmented labour these models are transformed into abstract market theory etc. This is done on the basis of mental constructs without any historical or the new microfoundations literature based on practical relevance.31 This, in turn, is the result imperfect and asymmetric information, Stiglitz of the static and reductionist nature of these being the main representative, following models, which make them incapable of Akerlof. Lange’s model, as we have seen, can incorporating social change and transformation. be considered as one of the first attempts at such a colonisation. Until the appearance of his VII. BY WAY OF CONCLUSION model the economic theory of socialism was the preferential ground of Marxism (and, in 76. Roemer’s project, and the modern market fact, continued to be until quite recently).33 socialist project in general, can be considered as 78. Roemer himself has been a long time part of a wider process currently under way in practitioner in this project. What is remarkable economic science, described as ‘economic in his case, is the fact that the target of his ’ (see inter alia, Hirshleifer, 1985; original attempt in this direction was not the Hodgson, 1994; Fine, 1997, 1999, 2000 and colonisation of another field of study or some references therein).32 This takes the form of other social science but another school of thought: Marxism. The procedure, however, has

31 Roemer (1994, pp. 126—7) himself seems to realise this been the same: the use of neoclassical tools when he says that the most probable test terrain for his () and method (methodological proposals are the former socialist countries where ‘the individualism, model building) to reconstruct opportunity costs of adopting market socialism are least’. Presenting, however, the ‘adoption’ of market socialism as Marx’s concepts redefine the Marxian project. simply a matter of choice between alternatives without the identification of the social forces that would bring it about, simply reinforces our claim that these models represent no more although, of course, the trend has been reversed: from than abstract mental constructs without any practical or narrowing its scope of application in the marginalist historical relevance to broadening it during this new revolution. 32 Fine (1997, 2000) has gone as far as to describe this process 33 Note that the term ‘economic imperialism’ was coined at as ‘the new revolution in economics’, drawing a parallel with about the same time as Lange’s proposal (Swedberg, 1900, p. the marginalist revolution as far as its significance is concerned, 14, as referred to in Fine, 2000, p.2).

NEW MARKET SOCIALISM: A CASE FOR REJUVENATION OR INSPIRED ALCHEMY? 21 79. The affinities of Bardhan and Roemer’s (ed.), The Allocation of Economic Resources, latest efforts concerning market socialism with Stanford: Stanford University the second direction in the colonisation process Press, pp. 41—51. are unmistakable. Socialism here is treated as a Bardhan. Pranab. 1993. On Tackling the Soft mere extension of the general equilibrium Budget Constraint in Market model to take into account incentive Socialism, in Bardhan, Pranab and Roemer, compatibility plus a change in the property John, (eds), pp. 145—155. rights. In this reductionist model building Bardhan, Pranab and Roemer, John. 1992. approach, socialism is treated on a par with Market Socialism: A Case for capitalism through a marginal extension of Rejuvenation, Journal of Economic principle (incentive compatibility) to take into Perspectives, Summer, vol.6, no.3, pp. 101— account some of the consequences of 116. informational imperfections and asymmetries. ⎯⎯⎯⎯. 1993. Introduction, in Bardhan, No reference whatsoever is made to any Pranab and Roemer, John. (eds), pp. 3—17. specifically socialist institutions. Thus, ⎯⎯⎯⎯. (eds.) 1993. Market Socialism: The although modern advocates of market socialism Current Debate, Oxford: Oxford have succeeded in reintroducing the question of University Press. incentives and motivation, an issue of crucial Becker, Garry. 1993. Human Capital: A importance for any discussion of alternative Theoretical and Empirical Analysis, with economic systems, back on the socialist agenda, Special Reference to Education, London: in most other respects, their actual models seem University of Chicago Press. to be more a sort of ‘inspired alchemy’ as ⎯⎯⎯⎯. 1996. Accounting for Tastes, Bardhan and Roemer (1993, p. 16) themselves Cambridge: Harvard University Press. in a self—critical comment indicate, than a Bergson. Abram 1948. , in ‘case for rejuvenation’ as the of their Ellis, Howard. (ed.), A Survey of article suggests (Bardhan and Roemer, 1992). Contemporary Economics, New York: Blakiston, pp. 430—58. VIII. REFERENCES Berle, Adolf and Means, Gardiner. 1932. The Modern Corporation and Private Adaman, Fikret and Devine, Pat. 1994. Property, New York: Macmillan. Socialist Renewal: Lessons from the Biais, Bruno, Hillion, Pierre and Spatt, Chester. ‘Calculation’ Debate, Studies in Political 1999. Price Discovery and Learning Economy, Spring, no. 43. during the Preopening Period in the Paris ⎯⎯⎯⎯. 1996. The Economic Calculation Bourse, Journal of Political Debate: Lessons for Socialists, Economy, vol. 107, no. 6, part 1, December, Cambridge Journal of Economics, Sept., vol. pp.1218—1248. 20, no. 5, pp. 523—37. Bliss, C. 1972. Prices, markets and Planning, ⎯⎯⎯⎯. 1997. On the Economic Theory of Economic Journal, vol. 82, no. 325, Socialism, Review, Jan/Feb. March, pp.87—100. pp. 54—80. Blackburn, Robin. 1991. Fin de Siecle: Arneson, Richard. 1993. Market Socialism and Socialism after the Crash, New Left Review, Egalitarian Ethics, in Bardhan, Jan/Feb, no.185, pp. 5—67. Pranab and Roemer, John, (eds), pp. 281—297. Brus, Wlodzimierz. 1972. The Market in a Arrow, Kenneth. 1959. Toward a Theory of Socialist Economy, London: Routledge Price Adjustment, in Abramowitz, W. and Kegan Paul.

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